Where Do I Form My LLC?

By Lee R Phillips

I have usually recommended that a person establish their LLC in the state where they are doing business. I am still a firm believer that the “secrecy hype” and all the other sales pitches that Nevada makes are basically bogus. It costs a lot more to do your LLC in a foreign state (one where you’re not doing business), because you have to pay the registered agent, pay all the fees in the foreign state, pay all the fees in the state where you’re actually doing business, etc. You have to pay income taxes in the state where you are making money, so there isn’t any tax advantage to doing business in Iowa and having your LLC in Nevada or Delaware.

The whole “incorporate or LLC in my state” thing is basically nothing more than a great business for the registered agent. All he has to do for his $500 or $1,500 a year is forward a couple of letters from the state to you each year and hang around to see if anyone wants to serve a lawsuit on him directed at your corporation or LLC.

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The question often arises as to whether the family company, a corporation, LLC, or limited partnership, should be owned by the parent’s living trust. Owned by the trust probably isn’t a good way of phrasing the statement. The company is owned by whoever owns the stock. (In an LLC there are “membership interests” and in a partnership, there are “partnership interests” – both general partners and limited partners.) The parent’s interests should be owned by their living trust.

The stock or membership interests are an asset that requires a signature to transfer it. Therefore, it will be subject to probate, if it is held in the name of a deceased person. To avoid probate, the ownership interests should be held in the name of a living trust. Thus, when the individual dies the interest or stock is not held in his or her name, but rather in the trust’s name. At the individual’s death, the interest is held by the trust and the trust document appoints another individual to act as the successor trustee. The successor trustee has full power to sell the stock, vote the shares or do whatever they have to in order to make the company continue.

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A lot of my students have questions along the following lines:

I have several properties that have Freddie or Fannie mortgages on them. Can I move them to separate legal entities in order to get some asset protection? What will this do to the mortgages?

Holding properties in separate legal entities is a good idea for asset protection purposes. The common scenario is to hold them in various land trusts. It doesn’t matter who the beneficiaries of the land trusts are, if they are the standard revocable land trusts that everybody uses, they will not give you any asset protection. There is the possibility that you can get some anonymity out of using the land trusts. That is a very small advantage, in my thinking. Your tenants, contractors, and everyone associated with the properties know who you are already. The only thing you are hiding is property from a general search for property ownership in the recorder’s office. The fact that you don’t show up as owning a bunch of properties might save you from a frivolous lawsuit, but most lawyers don’t check the county records before they file a suit.

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